Raise the tax shelter for home improvements ? Business ...

If you?re improving your home?say, putting in a deck or finishing a basement?a little forethought can provide some big tax savings.

Strategy: Keep detailed records of home im??prove??ments. The costs aren?t deductible, but you can add them to the home?s basis, thereby reducing the taxable gain on a future sale.

Good record-keeping helps maximize the benefits of the home sale exclusion. For a home owned and used as your principal residence at least two of the five years prior to its sale, joint filers can exclude tax on up to $500,000 of gain ($250,000 for single filers).

Example: You and your spouse bought your home 20 years ago for $400,000. In 2013, you add a swimming pool, patio and landscaping for $100,000. Then you sell the home for $990,000. Because your basis is increased by $100,000 your gain is $490,000, so it?s completely sheltered by the home sale exclusion. Without records, you would have been taxed on a $90,000 gain ($590,000 gain ? $500,000 exclusion).

This is even more critical this year due to new tax increases and the Medicare surtax on investment income. For instance, assuming you must pay the maximum 20% capital gains rate plus the 3.8% surtax, you would owe $21,420 in tax on your gain (23.8% of $90,000).

Tip: Also maintain records of past improvements used to increase basis.

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